Art as a Hedge
Against Inflation?For information only.
Not intended as investment advice.

Get
Ready for Inflation and Higher Interest Rates "The unprecedented expansion of the money supply could
make the '70s look benign" -Arthur LafferWall
Street Journal: June 11, 2009

The "Great
Recession" of 2008 saw the creation of trillions of dollars which some insist will
eventually result in inflation
...even hyperinflation.
Inflation is an insidious process which results in the erosion of purchasing power of a
given currency. During such times some investors turn toward "tangible assets"
--things that have a physical substance and that can literally be touched--
because of the belief that they will retain their relative value in comparison to other
things. Tangible assets might include real estate, vehicles, inventories, equipment,
certain commodities (including precious metals) and collectibles (antiques, stamps, gems,
precious metals.. and works of art).

Fine Art as an
Inflation Hedge? Here's what a few experts have to say.....(Click the underlined titles to access each article in its' entirety)

"Now, you might think of art as a
novel investment class, but many European aristocrats have preserved their wealth this
way for generations. And art is much more enjoyable to have around the house
than a pile of gold bars."

"Still and all, neither gold nor art pays a coupon.
On one level, the benefits of that are entirely obvious. On another, theyre
more subtle. Thats because, as likely as inflation appears, there still remain
powerful deflationary pressures, too (which is why all that money printing is going on,
after all). And a great antidote to deflation is current income: so investing in real
assets that also provide yield is a double-purpose move."

"Art
has long been considered an "investment of passion" that not only offers
aesthetic utility but the potential of economic benefit. Only recently, however, has art
been viewed through the lens of modern portfolio theory and considered a potential
alternative investment as part of a portfolio of assets. Though research continues to shed
more light on what has been historically an opaque market, studies show that art can offer
long-term return potential that is uncorrelated with other asset classes."

"The art market has undergone
significant changes over the last several decades. Newly acquired wealth in emerging
economies has globalized the market in many ways, giving the market much needed depth and
resiliency. Studies have shown relatively strong returns over extended periods of time,
and recent risk-adjusted performance looks comparable with other traditional asset
classes. Low and even negative correlations with equities and fixed income suggest an
allocation to art can potentially diversify one's portfolio. In addition, solid returns
during periods of high and rising inflation indicates that art can be an effective hedge
against inflation. Performance measurement of the asset class is not without limitations
and assumptions which should be considered when looking at historical returns."

"...While
the financial crisis has hit the hedge fund heavies and Russian industrialists who bid up
art during the boom, executives say well-heeled collectors are buying art now to
bolster their vaults against a coming bout of inflation. ...Industry observers
credit a familiar figure from the past  affluent collectors scared of inflation.
History does show that art prices rise during inflationary periods. The Art 100 Index,
compiled by Art Market Research, shot up 130 percent from 1977 to 1982, a period in
which prices rose 80 percent. With record amounts of fiscal stimulus being pumped into the
system, economists expect inflation to return..."

"Gold is frequently cited as investors' favorite safe
haven. But what about art? Art has a decent track record during times of inflation
 something central banks seem keen to see return... And as central banks flood
the global economy with cash, competition for goods and services could provoke inflation
 perhaps quite soon. That would push up the price of 'real' assets, such as art,
says Angus Murray, chief executive of the recently launched Castlestone Collection
of Modern Art fund... Art can indeed be a "valid refuge" from
inflation, New York-based art dealer Richard L. Feigen tells Bloomberg..."

"...Inflation
is inevitable  buy a Picasso. And a Warhol and a Fontana and a Rauschenberg
You probably think such a suggestion is a bit crazy, but I could not be more serious. So
serious in fact we are telling all our clients and prospects to put at least 5% of their
portfolios into art... Why art? I believe long-term art prices reflect a direct
relationship to money supply growth. I am not talking about contemporary art, but art from
well-known artists with established auction results.. In this respect, art is much
like gold in that the price of both responds to money supply. A comparison of gold and
art prices should therefore show a similarity and this is certainly the case... So
given the dramatic rise in gold prices over the last year or two, we should be able to
expect art to gain by similar amounts in coming months for the correlation to hold true...
In a world where fixed interest, property and cash all look unattractive, I am
advocating that my clients allocate larger percentages of their portfolios to real assets,
including gold, precious metals, other commodities and most definitely art."

"Most people would consider art, wine
and stamps as things to be enjoyed, drunk and licked  usually in that order.

Coutts, the 300-year-old wealth management business,
believes something different. According to quantitative research produced by the
London-based company, all three alternative investments should be added to an
investors portfolio to protect against the corrosive effects of inflation. The
findings show that art, wine and stamps provide a good inflation hedge over
different time horizons."

If it is not addressed, a 3 per cent rate of
inflation can erode wealth by half in less than 25 years.

The research overall shows the clear benefit of
adding alternative assets, says Ladure, noting that such assets are attractive
because they also allow individuals to combine their passions with investment. "

"The fact that stamps and art are considered
real assets, he says, and luxury goods prices have far outstripped core
consumer price inflation over the past 10 years, certainly contribute to their good
inflation-hedging qualities.

"Anecdotally, we have seen a continued increase
in demand for alternative assets, and this popularity is likely to continue as more people
enter the market.

"The performance of the Mei Moses All Art
index, a leading barometer of art returns based mainly on paintings sold in New York
and London, beat the total return of the S&P 500 index of US equities by about 9
percentage points."

Art prices are not correlated to sudden swings in
stock markets but their prices tend to match changes in wealth creation and destruction.
Im not surprised by this growth as we are not seeing the wealth damage of
2008-2009, said Michael Moses, creator of the index."

I crunched the data on gold, art and inflation since the
end of the Bretton Woods system. For art, I used the "Mei/Moses Fine Art Index,"
which tracks the prices of art based on repeat sales at auction, and captures 90% to 95%
of the market.

The Art NewspaperIs art a
hedge against inflation?"A recent glut of auction records suggest the rich are once again investing in
art"By Charlotte Burns. Market, September 2010

(Excerpts)

"A recent swathe of auction
records has led, as in 2004, to speculation that the rich may once again be treating art
as an investment vehicle."

"This was backed up by a report by
Capgemini SA and Merrill Lynch & Co published in June, which found that the number of
global millionaires grew 17% last year, and, with financial markets in flux, art had
emerged as the most popular category of passion investment.

The art world is inundated with
moneytheres so much liquidity out there because people are afraid of currency.
Theyve been told that art is a place to park cash.

"Art appeals because it is tangible, can be traded in any currency, and comes with
kudoscollectors cannot hang stocks and shares on a wall to show their friends. Art
may be particularly attractive now because of the uncertainties of the stock markets, big
currency fluctuations and the looming spectre of inflation in some major countries, and
deflation in others."

"Some countries, notable the United
States of America, China and England, have embarked on economic stimulus measures to spur
growth. They have chosen to go down the quantitative easing route, and print money as a
way of stimulating growth in their economies. Quantitative easing offers some form of
short-term relief but in the longer-term, it can cause serious repercussions. The end
result of printing money is inflation."

"It is a basic economic paradox; you
cant get richer by printing more money."

"The major push factors in the art
market are economic uncertainties by wealthy investors. Most seasoned investors have seen
the writing on the wall and have become more pro-active by investing in art,
instead of waiting for the economic storm to set in and watch their wealth erode in value.
Historically art has been one of the best hedges against inflation."

"Art has advantages over other types
of alternative investments, in that it is less volatile, being considered by
most as a long-term investment where a positive return is gained, long after any
economic storm is over."

"One should collect what one likes,
as long its rare, unique and of excellent quality. Art is a passion
investment and should satisfy your taste."

Obviously no investment is completely risk free nor guaranteed to produce a profit.
Nor should art be though of as an infallible hedge against an endless cycle of economic
booms and busts (and that even includes works by Randy Souders). However, there are ways
to minimize the risks while maximizing the rewards. Most reputable advisors recommend the
best strategy is to (a) buy works of well known, mature or deceased artists with
established followings and a strong, provable history of sales. Look for works that are
one-of-a-kind or of verifiably limited quantity and and always buy the highest quality
work you can afford. Above all, always buy what you like. After all, art is meant to be
displayed and enjoyed --not locked away in a vault. And should inflation ever come roaring
back as some predict, investing in tangible assets --including works of art-- may help
collectors preserve wealth while indulging their passion for collecting. Happy
hunting!